GM pays $50 mln to end lawsuit over 2009 hedge fund deal

* Mediated settlement removes risk of $918 mln impact on GM

* Hedge funds agree to reduce claims against "Old GM"

* Deal needs court approval by U.S. Bankruptcy Court in
Manhattan

Oct 1 (Reuters) - General Motors Co has agreed to pay
$50 million to end long-running litigation over a secretive deal
that was struck on the eve of the automaker's 2009 bankruptcy
that critics said favored hedge funds.

The agreement ends complex litigation in which hedge funds
affiliated with John Paulson and Paul Singer's Elliott
Management agreed to reduce the amount they said they were owed
in the bankruptcy of "Old GM." The agreement was reached on
Friday.

GM had warned the litigation could put it on the hook for
$918 million. That threat was removed by the settlement, which
still needs to be approved by the U.S. Bankruptcy Court in
Manhattan at a hearing scheduled for Oct. 21.

The litigation was brought by a trust that was set up to
uncover money for creditors who were shortchanged by the 2009
bankruptcy of GM.

The trust sued GM and the hedge funds in 2012, attacking a
deal that was struck as the automaker was filing for bankruptcy.
Under the deal, the hedge funds agreed to waive their claims of
more than $1 billion owed to them by a Nova Scotia unit of GM in
return for $367 million.

The deal was meant to keep GM Canada out of insolvency,
which would have complicated the snap sale of the best assets to
General Motors Co. Also known as "New GM," the company returned
to the stock market in 2010 while unwanted factories and
equipment were liquidated for the benefit of creditors.

But to other creditors of Old GM, who received pennies on
the dollar, it looked like a sweetheart deal.

The creditors trust argued the deal should have been
presented to the U.S. Bankruptcy Court for approval and should
be unwound. GM had said that doing so would potentially expose
it to claims of up to $918 million.

During the litigation, Judge Robert Gerber had said he was
"shocked" to learn of the deal. Closing arguments in the dispute
were scheduled for Oct. 9, although Gerber had indicated he
might take a long time to issue a ruling.

GM and the hedge funds denied wrongdoing and said the deal
was disclosed in securities filings. GM said in a statement it
was pleased to resolve the litigation.

GM will make the $50 million payment to a trust representing
the former Nova Scotia unit. The hedge funds agreed to cut their
claims against Old GM to around $1.54 billion from around $2.67
billion. Reducing their claim potentially increases the amount
available for other creditors.

The trust also issued about 6.2 million shares of GM stock
to the hedge funds along with about 10 million warrants for
additional shares.

Shares of GM were down 0.2 percent at $35.89 on Tuesday
afternoon on the New York Stock Exchange.

The agreement was reached following mediation overseen by
U.S. Bankruptcy Court Judge James Peck of New York.

The lawsuit originally named Aurelius Capital Management and
Appaloosa Management, but those hedge funds were dismissed after
they sold their holdings of the debt of the Nova Scotia unit.